The effect of macroprudential indicators on the repo rate: Evidence from South Africa

The repurchase rate (repo rate) serves as the primary tool of monetary policy utilised by the South African Reserve Bank (SARB) within its inflation-targeting strategy. The study examines the effect of macroprudential indicators on the repurchase rate (repo rate) established by the South African Reserve Bank (SARB). Examining the period following the Global Financial Crisis, this study explores how conditions in the financial sector influence monetary policy changes aimed at maintaining macro-financial stability. Employing the Autoregressive Distributed Lag (ARDL) bounds testing methodology, along with an Error Correction Model (ECM), the study utilises quarterly data spanning the period from 2008Q1 to 2023Q4. The model takes into account macroeconomic fundamentals, including inflation, GDP growth, external balances, and global interest rates. The findings indicate that increases in the Capital Adequacy Ratio (CAR) and household debt-to-income (DTI) ratio are associated with higher repo rates. In contrast, credit growth metrics have a countercyclical effect. The presence of a stable long-term relationship validates the importance of macroprudential factors in the development of monetary policy. Policy recommendations involve enhancing collaboration between the Monetary Policy Committee (MPC) and the Financial Stability Committee (FSC) of the SARB, augmenting macroprudential oversight, and adjusting inflation targeting to address systemic risk factors, thereby fostering both price stability and financial robustness.